SEC says client rosters create potential for conflicts

More than half of U.S. pension consultants or their affiliates provided products and services to both pension plan advisory clients and to money managers and mutual funds on an ongoing basis, according to a study released today by the U.S. Securities and Exchange Commission.

For some of these consulting firms, the compensation received from money managers comprised a significant part of their annual revenue, the report notes.

“It is clear from our examinations that many pension consultants must do more to identify conflicts of interest in their activities and to take steps to mitigate or eliminate those conflicts,” says Lori Richards, director of the SEC Office of Compliance Inspections and Examinations.

In the course of its examination, SEC staff reviewed documents and information from a cross-section of 24 pension consultants who are registered with the SEC as investment advisors.

The study also notes that a majority of the pension consultants have affiliated broker-dealers or relationships with unaffiliated broker-dealers that may provide a mechanism for money managers to compensate pension consultants, perhaps as a way to curry favor with the pension consultant.

“Although investment advisors owe their clients a fiduciary obligation–including adequately disclosing all material conflicts of interest–some pension consultants appear to have concluded erroneously that they are not fiduciaries to their clients,” says Richards.

The report notes the questions that have been raised regarding the independence of advice that pension consultants provide due to their service to two masters. “This duality in many pension consultants’ customer base may create a conflict of interest, which has the potential to cloud the objectivity of a pension consultant’s recommendation to advisory clients,” the report says. “Concerns exist that pension consultants may steer clients to hire certain money managers and other vendors based on the pension consultant’s [or an affiliate's] other business relationships and receipt of fees from these firms, rather than because the money manager is best suited to the clients’ needs.”

A spokesperson for the American Society of Pension Actuaries could not be reached for comment.

‘Many consultants must do more to identify conflicts of interest’